Covid-19 outbreak, ambiguity aversion, and macroeconomic expectations

Abstract

How will the outbreak of Covid-19 affect people's expectations on the macroeconomy? We conduct an online experiment in China to investigate the relationship between ambiguity aversion, risk aversion, and expectations about the macroeconomy after the onset of Covid-19 which can be considered an uncertainty shock. Our study differs from previous studies as we elicit individuals' preferences in terms of ambiguity aversion and risk aversion, and test how these preferences drive macroeconomic expectations. We find that ambiguity averse subjects are more pessimistic about the effect of Covid-19 on the economic growth rate. Ambiguity averse subjects are more likely to reduce consumption and expect lower savings in response to the outbreak. More risk taking subjects have more optimistic expectations on the macroeconomy, and they are less likely to reduce consumption, investment, and savings.

Keywords

• C93
• D84
• E2
• E3
• E71